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Reader’s Opinion

Federal Funds Keep Adding Up

July 11, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Puerto Rico’s economy has reached a gross domestic product of $60 billion and, as explained in your recent front-page story, $17.8 billion come from transfers from the federal government. (CB June 27). That means that 30% of our local economy is financed by the U.S. Congress according to its sole and total discretion.

Forty five percent of our GDP is generated by the manufacturing sector which generates $28 billion in exports, 95% of which are domestic ‘exports’ to the U.S. mainland, of which Puerto Rico is but a regional economy.

It has been ascertained mathematically that 40% of those $28 billion in exports, i.e., $11 billion, represents transfers of patents and intangibles under Rev. Prod 353-10 and Sec 482 of the U.S. Internal Revenue Code.

That means that 40% of our production in the manufacturing sector is not real, but an accounting fiction following still available (through 2005) federal government tax incentives. In other words, almost $18 billion (from federal funds transfers) plus $11 billion (intangibles transfers), or 44% of our economy comes from direct inputs from the federal government or from congressional fiat.

Now, it is true we contribute almost $3 billion annually to the Social Security program, but we receive $4.5 billion every year under that program, so that’s a net increment of $1.5 billion for our retirees.

It is true that we buy more than $2 billion in foodstuffs from the mainland. But it is also true that the nutritional assistance program, which totals $1.5 billion a year, and the School Lunch program and other federal funds to the Department of Education total another $2 billion. That means that our public education system, with 800,000 students, could not operate but for the $3.5 billion put in by the federal government; not bad for our small Caribbean island. The state of Israel, one of the largest recipients of U.S. foreign aid, gets only $5 billion a year in total.

On top of that, the Pell grant scholarships help pay the tuition of 80% of our college students; that’s an additional $1.5 billion for 100,000 students. In sum, our children go to public school to learn Spanish with U.S. dollars and our university students learn their skills in higher education with Pell grants, also from the U.S. But we insist in calling our island a ‘country’ and our culture a ‘nation.’

It is virtually incomprehensible that we would resist to learn and to teach English while our public education system depends on U.S. federal subsidies. Our parents are the product of bilingual public schools, but now we want to be somewhat less than what we can be.

Another item that deserves attention is the $1.3 billion in transfers through the federal Medicare program. This represents more than 30% of the revenue of private hospitals in Puerto Rico and approximately 40% of doctors’ income. This noble profession and the hospitals could not have access to the technology nor the medicines without the payments from the U.S.

In all likelihood, the private health plans that do <I>cost shifting<I> to Medicare could not keep their operations viable. The health industry in Puerto Rico already reaches almost $4 billion, between Medicare and Medicaid. These programs support 40,000 jobs in the health sector. But for the federal subsidies, there would be no economies of scale in the costs and the private health plans could not make ends meet at the current rates, making it impossible for our middle class to have medical and hospital care for $250 a month.

In short, our health and educational systems, as well as our manufacturing industry depend on and live off the federal funds that are under the exclusive control and discretion of the federal government, specifically Congress.

Let’s look now at the services sector. All economic activity generates demand for services. In Puerto Rico, the banking sector thrives from projects that require machinery, equipment and products that in turn generate a stream of revenue from which to pay for the loans. The jobs generated by those services generate deposits at the banks and demand for mortgages as well as commercial and personal loans.

Puerto Rico’s banking industry surpassed $100 billion in assets at the end of 2000. Through the Federal Deposit Insurance Corp., the federal government guarantees our deposits and the federal programs Fedetal Housing Authority, Housing & Urban Development, Freddy Mac and Ginny Mae foster a thriving mortgage banking sector in Puerto Rico where 70% of our workers are homeowners thanks to mortgages, most of which are guaranteed by the federal government through its programs. The same may be said of federal programs to guarantee highway construction.

It’s not difficult to conclude that the services of the banking, accounting, legal and insurance sectors depend on and live off the guarantees available under federal programs that make financing and services available; all of this thanks to federal programs that do not exist in other countries.

Then, there’s the tourism sector that despite all recent efforts, still contributes only 6% or 7% to our gross domestic product and the cruise ship industry that generates considerable demand for services. Ninety percent of our visitors come from the U.S. mainland. They come to our shores because it’s a U.S. territory. You need only travel throughout the Caribbean to appreciate what it feels like to arrive at a port like San Juan were the U.S. immigration and other laws apply and to appreciate the order and the infrastructure of ports and airports. In short, our tourism industry would not exist without those northern visitors. European tourism is limited and the Latin American tourist usually goes to the U.S. mainland.

Our dynamic commercial sector depends on and expands thanks to the purchasing power of consumers. But while only 20% pay out of their pockets for all they consume, almost 80% of our population receives some benefit under the federal Nutritional Assistance Program (PAN). What would be the pro-rata cost if there were no Food & Drug Administration and Farmers Home programs in Puerto Rico, or U.S. Department of Agriculture Nutritional Assistance and School Lunch programs? What would be the cost of federal crop insurance and subsidies? The cost of foodstuffs would be even higher, we would have fewer shopping centers and the costs of transportation and distribution would be prohibitive because few customers could pay for food, furniture, clothes and the like. Where would our famous shopping malls be without 45% of purchases made in cash?

The variety of products, businesses and suppliers in Puerto Rico’s commerce sector exist thanks to direct contributions of at least $3 billion in federal funds.

Of the state government we need only say that it constitutes the largest structural defect of our island economy. While it employs 22% of the workforce, the value of its services is practically nil for 30% of the population, who pays double for services it doesn’t use, and 60% of the people does not receive adequate services and pays very little for them.

We must learn from the system of counties they have in the mainland and we should adopt a flat tax so that the underground economy help defray our operational costs. Moreover, public service employees would give more valuable services if they worked in the private sector, and would probably also generate more income, although they would probably enjoy fewer holidays and fringe benefits, which are not at all helpful to a vibrant, developing economy.

Our cultural and ‘national’ pride should not blind us to the realization that much bigger countries with considerable cultural and historical wherewithal today live in tragic collective suffering with a somewhat tumultuous future for its youth and a not-so-golden retirement years for its elderly. Neither should we forget that the most productive citizens in those countries constantly seek to migrate to the U.S. mainland where we in Puerto Rico, by virtue of our U.S. citizenship, could relocate without restriction.

Jose R. Madera

Editor’s Note: Jose R. Madera is a former administrator of the Economic Development Administration who lives in San Juan.

This Caribbean Business article appears courtesy of Casiano Communications.
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